Monthly Archives: October 2015

Economics Myths, Part 8: The Chinese Data is Fake

If you pay attention to the financial media inevitably you’ll come across unsubstantiated musings disguised as rigorous analysis about China’s economy being ‘fake’. But the funny thing is, you never hear similar stories about Brazil’s economy being fake, or about Turkey or Russia’s economy being fake, but China is a favorite target by the doom and gloom left for reasons I explain here. This is in spite of the aforementioned economies doing much worse than China. It’s Brazil, Venezuela, Russia, and Turkey with weak, fake economies and currencies, not China. It comes down to envy and jealousy: the left resents China’s huge post-70′s success after switching from market-communism to capitalism. I guess being ‘pro diversity’, according to the left, doesn’t apply to high-achieving groups. The left hates winners and loves losers. That’s why the left keeps spreading FUD about a China bubble and and ‘fake data’, why the left attacks Silicon Valley for ‘lack of diversity’, why the left attacks the rich, and why the left chooses feminism over masculinity, dindu nuffins over the police, Islam over Christianity, and special education over gifted education.

The doom and gloomers have been regurgitating the same China conspiracy theories since 2005, and meanwhile China’s economy and stock market have boomed. Maybe it’s fake, but so are many things. Hell, even the universe may be fake if we’re living in a computer simulation. I think it’s safe to give China the benefit of the doubt. If it were fake, how would you explain all the huge sales Apple has reported in China? Or the huge growth in exports and imports to and from China? Or rich Chinese foreigners buying hundreds of billions of dollars of expensive American real estate?

For China’s data to be fake, it would also imply that S&P 500 companies like Apple that export to China are also reporting fake earnings data. When you raise this point, the left has no rebuttal. Not only that, but given the multi-decade growth of China exports & imports, it would be one of the longest-running frauds ever in addition to the biggest.

Obviously, there is wealth and economic growth being created in China, even if we can’t trust the numbers with 100% certainty, but, then again, few things in life are ever certain except, to quote Benjamin Franklin, death and taxes.

Also, some say China’s GDP is 5-6% instead of the purported 7%. So what. Calculating GDP is more of an art than a science, anyway. Even US GDP numbers have large margins of error and multiple revisions.

But the foreign markets, with the exceptions of China and Hong Kong, are bad investments and make good hedges against a long S&P 500 position.

Black-White IQ Gap Debate

In theoretical physics, there is a big debate over ‘mass gap’; in the world of HBD, the debate is over ‘IQ gap’, on Unz over blogger Chanda Chisala’s two articles which refute Africans have a lower IQ than whites:

The IQ Gap is no Longer a Black and White Issue
Closing the Black-White IQ Gap Debate, Part I

This is one of the ‘better’ rebuttals of HBD, which is probably why Unz posted it and why it has generated so much discussion. But there are still holes.

First point, the data of low-IQs in Africa has been corroborated by many studies, as summarized in Rushton’s influential paper
Race Differences in Cognitive Ability:

Most disputed is the validity of the low mean IQ scores reported for subSaharan
Africans. Lynn’s (1991) review of 11 studies found a mean IQ of 70. A
subsequent review of over two dozen studies by Lynn and Vanhanen (2002) found
an average IQ of 70 for West, Central, East, and Southern Africa. For example,
in Nigeria, Fahrmeier (1975) collected data on 375 children ages 6 to 13 years in
a study of the effects of schooling on cognitive development. The children’s mean
score on the Colored Progressive Matrices was 12 out of 36, which is at the 4th
percentile for 91⁄2-year-olds on U.S. norms, or an IQ equivalent of about 75
(Raven et al., 1990, pp. 97–98). In Ghana, Glewwe and Jacoby (1992) …

Second, the slowness of ‘reversion to the mean’ doesn’t disprove self-selection bias. Reversion to the mean is probably slow due to assortative mating, which is common among high-IQ individuals.

A commenter writes:

Anyway, given the high level of assortative mating for intelligence I am not confident that a large degree of regression to the mean would be predicted in any circumstance. Jensen seemed to think other wise, but I am not sure why. In Jensen and Rushton’s 2005 paper they seem to imply that significant regression is predicted because of epistatic effects with their metaphor about dice rolling. This is extremely odd given that the actual inheritance pattern behind the genetics of intelligence is usually thought to be extremely additive.

How much reversion or how quickly it occurs is hard to quantify exactly, but it exists. And slow reversion is insufficient to disprove Rushton’s IQ meta analysis; maybe Jensen is wrong, which is always a possibility.

The author continues…

What are the chances of a girl from a small minority group of immigrants whose home country is 2 standard deviations below the host country’s mean IQ achieving the best academic results in the host country? If the average IQ of SubSaharan African adults is equal to 11 year old Europeans, as their IQ scores estimate (Rushton, 2004), what are the chances that an African child of such adults would ever beat all European children in academic achievement?

Statistically, the chances are technically more than zero, which is why it occasionally happens. No one in the HBD community would say it’s exactly zero.

Third, he’s over-generalizing the HBD community as being this monolithic group whose entire thesis hinges on whites being superior to blacks. Obviously, he hasn’t read many HBD blogs, because HBD is more nuanced with a focus on data and empiricism over race-based zealotry. IQ is an accurate predictor of socioeconomic outcomes, with lower-IQ people being over-represented in poverty, crime, welfare dependency, and other societal ills. And I also support policy such as more money for gifted education – for high-IQ individuals of all races – so as to not squander America’s most important resource: cognitive capital. The aforementioned statements alone are enough to elicit much mouth foaming from the ‘blank slate’ left, let alone introduce race.

Continuing…

Africans in the UK who have both low income and low wealth have children performing at the white average or even above (and as I will definitively prove in part 2, this is certainly true of African immigrants in America too).

‘African American elites’ is not to be conflated with self-selected African elites who study in Europe and America, the former who score poorer on IQ and achievement tests then the later. The later are selected by IQ; the former mostly by wealth. It’s smart Africans who are immigrating, not just rich Africans.

Continuing…

The fact that these high income blacks live in good neighborhoods with high quality schools should have indicated to policy makers that the solution for black children underachievement is not more spending on education or taking poor blacks to schools in better neighborhoods (since the ones already living in good neighborhoods still perform badly); it is not even about improving their incomes, clearly. But that would be in a world where policy is driven by cold logic and data rather than hot sentiments and ideology (from the left or the right).

I agree political correctness has resulted in ineffective policy, hence wasted resources. Both sides would rather repeat feel-good platitudes than deal with biological reality.

Continuing…

I actually know that the average African immigrants to the UK from any nation or tribe are not from the African elite class, economically or intellectually (even if there is a small segment from the super-professional class), as many people on both sides of the debate assume,

Anecdotal evidence does not refuse the aforementioned IQ studies, nor does it disprove self-selection bias. If these non-elite but high-IQ Africans were dumped back to their villages and towns in Africa, I’m sure they would feel socially awkward. To the author who is of above-average IQ, these other high-IQ Africans probably seem normal, but to the typical African they are not.

As the debate progresses, I’m skeptical the Race/IQ question will ever be answered to anyone’s satisfaction, but there is probably uniform agreement about the social implications of IQ.

The Rise of STEM: Wealth and Intellectualism Über Alles

Abstract mathematics, theoretical physics, computer science, and quantitative finance, all of which compose the constellation called ‘STEM’- is cachet of ‘nobility’ in the post-2008 economy, the new ‘cool’ among millions of millennials who aspire for prestigious careers that involve wealth or intellectual recognition, preferably both, as embodied by the likes of Musk, Thiel, and Zuck. Unlike the useless single mom drawing government benefits, or the overpaid corporate cog, people in STEM create economic value through intellect and competence, which is why everyone likes STEM and why people in STEM get rich.

The left hoped OWS, the overblown financial problem, and two terms of Obama would turn an entire generation against the ‘ubermensch‘, and oh how wrong they were as capitalism and wealth creation, whether on Wall St. or Silicon Valley, reign supreme – both tangibly and in the collective psyche of the 20-30 year-old American millennial mind. The left’s vision of egalitarianism snuffed as IQ has become more important than ever and wealth inequity keeps widening. In 2014, the SJWs and Thomas Piketty’s Capital in the Twenty-First Century, which was supposed to sound the alarm over wealth inequality, both failed as Gamergate dominated the narrative and Piketty’s thesis was later tainted by revelations of data fabrication, to put it gently. The strength of the US dollar, stock market, and treasuries is giving the left, who had hoped for a ‘post-America era‘, the finger. Obama, in 2008 billed by the liberal media as the ‘great orator’, is looking increasingly effete and meek like the uxorious wealth spreader that he is – a kid in an oversized suit – as Putin domineers foreign policy, and Trump – the epitome of masculinity – domineers the 2016 campaign.

For generations – from 50′s all the way to the 90′s – the cool ‘thing’ to be was a rock star with a record that was certified ‘gold’, or maybe an actor or professional athlete. Then, in the 2000′s era, with the ‘information age’ and the post-2008 economy, that changed. Although athletes, actors, and musicians are still popular, a fourth category has been introduced: the tech/intellectual superstar, who may not be as widely known by the general public, but is revered by throngs of ‘groupies’ online on sites like Reddit and 4chan, which with their millions of users are bigger than Woodstock anyway. And once you look at the math involving agents and record labels, the rock stars of yesteryear didn’t keep much of the money they made, whereas today’s tech superstars are getting rich overnight and staying rich. And whereas in the past, success was mostly due to luck, record label connections, and consumer tastes for certain genres of music, the meritocracy rules in the Silicon Valley – results over social skills, the later which sometimes mask incompetence (as is painfully obvious with Obama, who won twice with the help of charisma and the media over his smarter, more experienced opponents).

For example, a month ago an Imgur post of an engineer trying to get though airport security, with the flummoxed security agent trying to make sense of the engineer’s contraption, went hugely viral on Reddit, with thousands of people up-voting and commenting. It got over 11,000 ‘up-votes’, which is about four times as many as a typical viral post. For that week, the unnamed engineer was a ‘rock star’. He could have created a blog, written a book, and maybe gotten Matt Damon to star in the movie adaptation.

The overwhelming success of The Martian is another example of STEM culture becoming mainstream – the story of an astronaut who stays on Mars rather than have to return to the political correctness on Earth. Ok…I made that last part up, but it would have been a better movie if that were the plot.

From high-IQ foreigners coming to America to study STEM, to web 2.0 valuations surging, to high-IQ foreigners working in Silicon Valley tech and buying expensive real estate, to the Silicon Valley engineer embracing MGTOW culture by living in a van, to the continued destruction of the SJW narrative, again and again, the left, who want to turn back the hands of time to simpler era of less technology and more overpaid jobs, are fighting an uphill economic and ideological battle they are losing and cannot win. The story of the San Francisco software developer living in his van went viral everywhere – Reddit, Voat, 4chan, and Yahoo news – because he’s today’s STEM ‘rock star’ going his own way, becoming rich while living a lifestyle of minimalism, in alignment with the millennial mindset of individualism over the collective.

Related:

Taking the ‘Omega’ Pill
Our STEM Nobility
Autism/Asperger’s the New ‘Cool’?

2060 IQ Projections

Interesting new study: Future Cognitive Ability: US IQ Prediction until 2060 Based on NAEP

From the abstract:

…US Census Bureau, cognitive trends until 2060 for the entire age cohort and ethnic groups were estimated. Estimated population averages for 2060 are 103 (optimistic) or 102 (pessimistic). The average rise per decade is dec = 0.76 or 0.45 IQ points. White-Black and White-Hispanic gaps are declining by half, Asian-White gaps treble. The catch-up of minorities (their faster ability growth) contributes around 2 IQ to the general rise of 3 IQ;

A modest IQ gain of 2-3 points by 2060 is expected. But, technically, IQ does not rise; instead people become more intelligent and tests are re-designed with harder questions to maintain the same mean, and variance.

Not surprisingly racial IQ disparities will persist with Asians outperforming everyone by a substantial (and growing) margin, although I’m skeptical about projected Asian gains:

As for the methodology, scholastic assessment is used as a proxy for IQ, both of which are highly correlated:

… Empirically, results of scholastic tests and psychometric IQ are highly correlated. Kaufman, Reynolds, Liu, Kaufman, and McGrew reported a latent correlation of rl = .83 (N>2,000) between the Woodcock-Johnson Tests of Cognitive Abilities and the Kaufman Test of Educational Achievement [34]. This result is backed by studies of real-world school achievement: e.g. rl = .81 between General Certificate of Secondary Education scores and Cognitive Abilities Test (N>70,000) [35] or rl = .86 between Scholastic Assessment Test and Armed Services Vocational Aptitude Battery (N>900) [36]. At the national level (the one we will use in our analysis) the correlations are even higher (e.g. r = .89, N = 99 countries) [37].

The economic implications are fascinating:

We calculated expectable wealth productivity effects (in US Dollar of 2010/2011). Internationally, one IQ point corresponds to $810 higher average productivity per capita and year. Between 2012 and 2060 it is expected that 17 year olds’ ability level will increase by 2.16 (pessimistic model) or 3.68 IQ (optimistic model), representing a productivity gain of $1,750 to $2,981 (at constant prices). The general FLynn effect (White’s slow ability rise) contributes at about $219 to $1,806, minorities’ catch up at $1,644 to $1,450, demographic change at–$1,102, interaction between minorities’ catch up and demographic change at $988 to $834 US Dollar.

Smarter people create more economic value, a point I have hammered repeatedly on this blog and confined by actual data. Maybe this should be taken into consideration for America’s immigration policy, as low-IQ people tend to consume more in public benefits than economic value they produce in return. Something as simple as administering IQ tests for immigrants and turning away anyone who doesn’t score above a certain threshold, I imagine, would help put a dent in the growing entitlement spending problem.

This is also compelling argument for eugenics, as raising the national IQ could have substantial compounded returns, economically and socially, for future generations.

I’m skeptical about the projected Asian gains in IQ, especially since the gains are so much greater than for whites, and the paper doesn’t offer a compelling explanation. Maybe assortative mating is the reason, but the paper doesn’t cover this, since of the projected IQs are extrapolated from a linear regression. The weak gains for other races confirms that the ‘Flynn Effect’ may diminish with economic development, which I discuss in more detail here, suggesting that purported gains in IQ are not from people becoming biologically smarter but people living up to their ‘full’ cognitive potential due to better environment. But then wouldn’t we also expect East Asian IQs to plateau at around 107, not 112. Due to the weakening of the Flynn Effect, eugenics may hold promise as a viable long-term solution to boost IQ for developed nations.

IQ Tests Are Not Culturally Biased

Although the left believes IQ tests culturally biased, the evidence according to Arthur Jensen in his book Bias in Mental Testing suggests otherwise:

…The book presents several arguments that IQ tests are not biased. African Americans’ lower average performance on IQ tests cannot be because of differences in vocabulary, because African Americans have slightly better performance on verbal tests than on nonverbal tests. The IQ difference also cannot be because the tests depend on White culture, or that Whites inevitably do better on tests designed by Whites. In fact, Blacks perform better on tests that are culturally loaded than they do on tests designed to not include cultural references unfamiliar to Blacks, and Japanese children tend to outscore White children by an average of six points. Nor can the difference be a reflection of socioeconomic status, because when Black and White children are tested who are at the same socioeconomic level, the difference between their average IQs is still twelve points.[2]

The book also presents evidence that IQ tests work the same way for all English-speaking Americans born in the United States, regardless of race. One is that IQ tests have been very successful in predicting performance for all Americans in school, work, and the armed forces. Another is that the race and sex of the person administering a test does not significantly affect how African Americans perform on it. The ranking in difficulty of test items on IQ tests is the same for both groups, and so is the overall shape of the graph showing the number of people achieving each score, except that the curve is centered slightly lower for Blacks than it is for Whites.[2]

A report by School Psychology Quarterly Bias in Mental Testing since Bias in Mental Testing agrees with Jensen’s findings:

One popular and longstanding claim is that mean differences are caused by
“cultural bias” in the tests. Arthur Jensen exhaustively reviewed the empirical literature on
the issue of test bias, which resulted in his seminal book, Bias in Mental Testing (BIMT),
published in 1980. On the basis of empirical criteria for evaluating test bias, Jensen concluded
that standardized aptitude/ability tests predict equally well for American-born, English-speaking
majority and minority subgroups and measure similar constructs. This paper
summarizes the major conclusions from BIMT and evaluates writing on test bias published
since BIMT. We conclude that empirical research to date consistently finds that standardized
cognitive tests are not biased in terms of predictive and construct validity. Furthermore, continued
claims of test bias, which appear in academic journals, the popular media, and some
psychology textbooks, are not empirically justified. These claims of bias should be met with
skepticism and evaluated critically according to established scientific principles.

So now you have the left dismissing college in much they same way they dismiss IQ tests. If some people score low, it’s because of racism or some imagined external factor, not because of innate individual cognitive differences. For the left, the modus operandi, again, is the same: blame large external targets (society, the economy, college, technology…) for individual deficits and differences that are biological in nature, not external.

Economics Myths, Part 7: The Baltic Dry Index is a Reliable Economic Indicator

Doom and gloomers on Zerohedge and elsewhere frequently cite the falling Baltic Dry Index (BDI) as evidence the economy is weak, apparently oblivious to how the BDI works or its poor correlation with overall economic health.

From Wikipedia:

The Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”[1]

Here’s a chart of the BDI:

As you can see, the index has been flat since the 80′s, despite the size of global economy tripling. This is because the BDI is much less of an economic indicator than it is of an indicator of the health of the bulk-shipping industry. Ships are always being built and the fleet size keeps growing, so even if the index rises, more ships are built, which depresses the index until an equilibrium is attained, which is somewhere around 1,000. That is why the index doesn’t move much. Shipping tends inelastic, meaning that when prices rise demand remains unchanged and, also, because it takes many years to build new ships, an acute shortage can cause price spikes, which can can explain the price surge between 2004-2008. Subsequently, when the economy contracts, like it did following 2008 global recession, there is a glut of ships – hence prices plunge.

Ships were still being built as dry bulk orders plunged, a bad combination that put a lot of downward pressure on the index:

The glut is due to the build-up of ships between 2004-2009 when the global economy was stronger. The post-2011 weakness in the emerging markets and commodities also contributed to the decline.

Another major reason for the decline of the BDI is oil imports falling – not because the economy is weak, but because of increased domestic production:

And exports keep making news highs, further evidence the US economy isn’t weak in spite of the BDI falling:

Another Defeat for SJW-Left: Sweden opens world’s first male rape centre

The post-2013 implosion of the SJW narrative continues. This is going viral on Reddit:

Sweden opens world’s first male rape centre – A hospital in Stockholm is understood to be first in the world to set up an emergency department specifically for male rape victims. The clinic at Södersjukhuset opened on Thursday as part of a strategy to ensure “gender equal” patient care.

I guess ‘rape culture’, according to the left, only applies to male-on-female rape, not female-on-male rape. The commentariat agree, with hundreds of posts on Reddit and elsewhere in agreement:

Good. I have a male friend who is the victim of female rape. It’s absolutely disgusting that there is no where for him to go for help. Even if there was I’m doubtful he would now utilize it as he’s been led to believe that it wasn’t rape and that he’s being stupid for being affected by it. I hope that this centre is just the start and society realizes that this is an important issue that NEEDS to be addressed. It’s long overdue.

I have a friend who was raped by a woman, he’s a man. The penis does not always know the difference. She worked him up against his will.

He’s done pretty okay despite the trauma, mostly suffering from the concussion she gave him when she knocked him down with a plank. Sporadic headaches for instance. Thankfully she had no diseases. She was arrested. Not a drug addict or any such thing. Divorced mother of two with no previous charges.

like it or not male rape isn’t taken seriously. Especially in the US. There’s not such thing as a court advocate for a male victim. There’s little chance of proving it. And fewer than 10% of men would report being raped because no one would believe them.

STEM vs. Liberal Arts: Which is Harder?

The essay Who’s the alpha male now, bitches? got me thinking – not about the subject matter of angst-ridden young adults and mass shootings, but the inimitable eloquence of the writing style itself. The precision and skill of how the words were chosen and arranged to make the essay informative yet galvanizing.

So, is STEM easier or harder than the liberal arts? The online opinion seems to skew in favor of STEM being harder, but it would be nice to have an official academic study about this. Another, perhaps related, question is: which subjects are perceived to be harder? For student who found high school easy and got good grades, which subjects are they more likely to major in college, versus c-grade high school students. I imagine students who perform poorly in high school, once in college (assuming they go), will choose subjects they perceive to be easier. If c-grade high school graduates are choosing STEM in collage, and a-grade high school graduates are choosing literature, philosophy, and history, then STEM may be easier. And then you would have to look at the graduation rate and GPA. If c-grade students who major in STEM outperform c-grade students who major in liberal arts, it would further lend credence to liberal arts being harder.

Although the data shows the humanities have a higher GPA than STEM, this does not necessarily prove the humanities are easier:

Major Average GPA
Education 3.36
Foreign Language 3.34
English 3.33
Music 3.30
Religion 3.22
Biology 3.02
Psychology 2.98
Economics 2.95
Engineering 2.90
Math 2.90
Chemistry 2.78

It could be that all the a-grade students are flocking the the humanities, while the c-grade ones go to STEM. The a-grade students, possibly being smarter, get higher grades than the c-grade students.

If SAT scores are a good proxy for high school performance and IQ, we would expect low-scorers to major in ‘easier’ subjects:

Interestingly, literature, social science, and linguistic majors have as high of SAT scores as most STEM majors. Although math and physical sciences rank among the highest, the difference isn’t substantially higher than that of the literature majors. The major ‘liberal arts’ is only four points lower than biology. The study also doesn’t tell us the completion rate, only the choice of major.

It’s also been observed that the verbal sections of both the GMAT, ACT, and SAT are harder than the quantitative sections, with top verbal scores being much rarer than top math scores, although this can be attributed to the verbal sections having a higher ‘ceiling’ than the math sections.

One possibility is that the threshold to become ‘good’ at math is lower than to be ‘good’ at literature and writing. Maybe it’s easier or more attainable for your typical high school graduate to grasp advanced calculus and special relativity than, say, publish an article in the New Yorker.

Perhaps STEM is more inclusive than liberals arts. It seems there is a sort of pretentiousness in liberal arts, especially with literature and the divide between ‘low-brow’ and ‘high-brow’ tastes. Another question is, how do you define ‘hard’ and ‘complexity’; what makes a subject ‘complicated’? Is it the number of things you have to memorize, the quantity of reading, the synthesis of information? STEM may be easier because usually the only thing that matters is the correct answer or outcome, not the ‘prettiness’ of the underlying mathematics. Whether you pass or fail depends on your ability to product correct responses to technical questions, not necessarily elegant responses. The liberal arts, especially writing for publication, requires not only a unique perspective but the ability transcribe your ideas into prose that is grammatically correct and enthralling to the editor and reader. It’s like imagine in math you not only have to produce the correct answer, but are restricted to a certain set of symbols in your derivation, but, on the other hand, some STEM problems are very difficult.

More Emissions Violators is Good News for Volkswagen

The chattering classes are puzzled as to why Volkswagen stock has rebounded so strongly in recent weeks, up 30% on no apparent news:

Furthermore, at the same time, it has come to light that additional manufactures have emissions violations, namely Audi, Mercedes-Benz, Honda, Mazda, and Mitsubishi.

Italians halt VW diesel sales, Audi admits 2.1 million cars feature cheat software

‘Dieselgate’ Isn’t Just About Volkswagen Anymore

Four more car makers join diesel emissions row

Intuitively, one would expect this to be worse news for Volkswagen, but obviously the stock has taken it in stride, surging in spite of these revelations.

So what’s going on here?

It’s very simple…imagine you’re in school and you turn in an assignment late. The teacher may fail you. Now what happens if everyone in class turns it in late. The teacher will probably compromise; he can’t fail everyone. It’s bad for his career having having a class where everyone fails, and parents will get mad too. The result is everyone gets off easier…it’s like the prisoner’s dilemma, where cooperation produces the best outcome.

So in the past three weeks there have been more emissions offenders which, analogous to the student example, possibly lessens the punishment for each manufacturer, including Volkswagen, since the emissions standards may have been too high to begin with.

Having more offenders makes the whole thing messier for the government. Cars are a big part of the US economy and a large source of jobs, since foreign car manufacturers build plants in America. The government isn’t going to cripple a major part of the economy over an overzealous emissions standard, so likely a concession will be made that results in an outcome for Volkswagen that isn’t as bad as originally feared.

For someone who wants buys a Volkswagen, his second-best preference is likely be Audi, Mercedes Benz, or some other European manufacturer. This is good news because Volkswagen having its competitors also recalled and fined is better for Volkswagen than just having Volkswagen recalled and fined.

But another possibly is that the stock was oversold and due for a recovery.

Just another example of the weird, counterintuitive world of economics.

Economics Myths, Part 6: Alan Greenspan Caused The Financial Crisis

Greenspan: Fed Not Responsible for Financial Crisis

If a lie is repeated often enough it becomes the truth, and there are few better examples than the tar and feathering of Alan Greenspan for his alleged role the housing and financial crisis. But the preponderance of evidence suggests his culpability is limited or non-existent. In other words, Greenspan’s legacy was tarnished by events out of his control.

The predictable narrative by lazy financial pundits goes as follows: Greenspan lowered rates too low, and kept them low for too long, causing a housing bubble that imploded under his watch. Yes, Greenspan did lower interest rates from 6.5% in 2000 to as low as 1% in 2004, but what is ignored by the financial press and media is that Greenspan actually raised rates many times in the 90′s, especially in 1999, to quell the exuberance in the stock market and economy, as shown below:

One could in fact argue he was too hawkish because by 2000 the economy would enter a recession as the dotcom bubble burst. But the fact Greenspan raised rates in the 90′s and later between 2004-2006 is ignored by the media, who, in the aftermath of the crisis, kept repeating the narrative that Greenspan was somehow this ‘great blower of bubbles’. And, of course, Greenspan did warn of irrational exuberance in 1996, which went unheeded. But no one got mad when tech stock fell, but when housing prices did, everyone brought out the pitchforks and pointed them at him.

But did Greenspan leave rates too low for too long; the consensus is he did, but one must understand that lowering interest rates in response to recession is conventional monetary policy, and then 911 exacerbated things. The 2003-2007 economic expansion, with the exception of the housing market, was tepid and inflation was low, so it’s not like the economy was overheating. Maybe he should have only lowered them to 2%; however, in the grand scheme of things it would not have mattered, as the seeds of the subprime bubble were planted in the 90′s.

As explained in an earlier article Misconceptions About the 2008 Financial Crisis, the origins of the subprime crisis date back to the early 90′s when lending standards under Clinton were relaxed to boost home ownership:

The Department of Housing and Urban Development (HUD) loosened mortgage restrictions in the mid-1990s so first-time buyers could qualify for loans that they could never get before.[131] In 1995, the GSE began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[132]

As shown above, not surprisingly, the subprime market did indeed grow, from $50 billion to $150 billion from 1994 to 1998, and, notably, this occurred as interest rates were rising. High interest rates between 1998-1999 did not reverse the subprime boom. The explosion of the subprime market between 2002-2006 was a 200% increase, which is actually the same rate of growth from 1994-1998. One could argue that the second wind in the subprime market was fueled not by low interest rates but by ‘animal spirits’ and money flowing out of tech stocks into housing. Keep in mind the subprime market boomed in the 90′s as rates were high. When the housing market popped, a lot of borrowers found themselves immediately underwater, and low interest rates would not have mattered – indeed, they didn’t as the subprime market failed to recover despite interest rates remaining at 0% since 2008. Nearly a decade later, many housing markets are still well below their 2006 highs.

Here is a chart of national home prices vs. the 10-year treasury bond, which is a good proxy for mortgage rates:

The the indictment against Greenspan is predicated on the dubious link between low interest rates and housing prices. As you can see above, further weakening the case against Greenspan, housing prices were stagnant between 1982 and 1997 as rates fell considerably. And despite rates surging from 2% to 14% between 1950 and 1982, the housing market did not fall. Given the tenuous link between interest rates and home prices, overall, the 2000′s housing boom was an extreme outlier that Greenspan couldn’t have possibly fomented, foreseen, or reversed – and this is ignoring the role played by the Clinton administration, which obviously contributed to the boom.

To anyone who has studied the data, this is self-evident, but facts tend to get lost in the ‘blame Republicans’ narrative.